Saturday, October 06, 2012

Gimleteye: Jack Welch and cooking books

My friend from the financial services industry said Jack Welch, octogenarian and former GE CEO, gave him the best laugh of the week when he accused the Obama administration of cooking the books of the Bureau of Labor Statistics. Favorable job numbers lean away from Mitt Romney and toward the re-election of the president.

Both political parties, depending on whether they are in power or not, whine about job numbers failing to incorporate citizens who have given up trying to find work. In his widely criticized comments, Welch betrayed familiarity with cooking books. "Can't debate so change numbers," Welch tweeted. Coming from Jack Welch, that is coal calling the kettle, black.

Corporate book cooking was a hallmark of the Welch tenure at GE. Its businesses involved in finance created vast wealth for insiders in ways that ordinary investors can scarcely fathom. Unfortunately for common stock owners, GE has plenty of company in the financial services book cooking business. GE brings good things to life, but better things from picking up scraps fallen from the GE finance table.

Federal laws allowing corporate books to be cooked (special purpose entities, anyone?) are largely responsible for the worst crisis since the Great Depression. Legal book cooking and cover ups lead to the collapse of Lehman Brothers and the race to block accountability from ever questioning the whole. For a primer, Risk diversification works, according to the Federal Reserve Bank of St. Louis. It depends for whom.

Welch retired in 2001 with a personal fortune of nearly half a billion dollars. In March, 2002 the investment community cast a wary eye toward the financial engineers at GE: "Investors are hoping to get a deeper look into the increasingly mysterious workings of General Electric (GE) on Thursday as the company hosts its first-ever quarterly conference call."We expect GE to disclose significant additional information to help shareholders better understand the areas and sources of growth within its business," said Nicholas Heymann, an analyst at Prudential Securities. GE has faced heightened pressure and scrutiny since the collapse of Enron as investors worried that other large and complex companies could be skewing their numbers with questionable accounting."

The collapse of Enron turns out to have been a small event in relation to the housing bubble spawned by the Bush White House response to 9/11. President Bush urged consumers to go out and shop after the World Trade Towers were blown up, and the Ownership Society, conceived by Karl Rove as a political and economic event, triggered trillions of dollars in debt supported by taxpayers for which risk turns out to have been unquantifiable.

The Welch allegations were less interesting than watching appointees from the Bush White House rush to the defense of the Bureau of Labor Statistics. This circling of wagons has another purpose: to deflect attention from what really riles the public about government statistics: inflation.

There are more voters affected by inflation than jobless. Far more.

Any consumer who has paid attention knows that government statistics on inflation have been skewed to conceal the rapid decline in purchasing power through hidden inflation. It is not the statistics that count so much as the metrics. John Williams, on his website "Shadow Government Statistics", explains: "In 30 years as a private, consulting economist, I have noted a growing gap between government reporting of inflation, as measured by the consumer price index (CPI), and the perceptions of inflation held by the general public. It has been my experience that the general public believes inflation is running well above official reporting, and that the public’s perceptions tend to mirror the inflation experience that once was reflected in the government’s CPI reporting. The growing difference in perception versus reality primarily is due to changes made over decades as to how the CPI is calculated and defined by the government. Specifically, changes made to the definition of CPI methodologies in recent decades have reflected theoretical constructs offered by academia that have little relevance to the real-world use of the CPI by the general public. Importantly, these changes generally are not understood by the public."

This part of the public conversation, no political party wants to have because it tracks directly to gridlock in Congress and the incremental decline of the middle class.

I can't tell you if Jack Welch's knee-jerk tweet about the fidelity of the Bureau of Labor Statistics has any substance. On the other hand, to the extent that public confidence has been badly marred by creeping inflation -- and the fact that government inflation formulas omit key features of the real costs Americans have endured over decades -- Mr. Welch inadvertently, perhaps, pointed to the issue that worries all voters.

6 comments:

Anonymous
said...

Somewhat like the humor we on the right wing see in Al Gore's oxygen deprivation excuse for Obama's poor showing at the debate. I put nothing beyond this administration to spin information to maintain power.